Hello there,

Today’s edition is a bit of a change of pace from usual. We’re living through a strange time for early-stage startups. There are incredible founders out there doing really high-potential work, some of which genuinely has the potential to change the world, but investors are increasingly averse to putting money down.

…at least, that’s the narrative we hear. So I decided to reach out to some early-stage startups in the ‘from inception to raising Seed’ window this newsletter focuses on, to see how they’re faring and to find out what their sense of the investment landscape is right now.

Make sure you read the whole of the newsletter to the end so you don’t miss out on another Member Spotlight, and details of a brief interruption in service.

– Martin

How do founders feel about early-stage investment right now?

Earlier this week, I asked a bunch of founders about their recent experiences of raising pre-seed and seed investment in the UK.

Given that founders of early stage startups are nursing tiny baby birds that they hope to grow into mighty eagles, asking them to be quoted in a newsletter read by investors would have been a good way to get bland, hyper-defensive “everything’s great!” responses, so I gave them the option to speak anonymously, which they almost all took up.

At a high level, this first quote from a founder sums up the current situation as we hear it discussed most of the time:

“The early stage investment environment right now is horribly frozen - I was told only yesterday that interest rates are limiting investment. Companies are going to have to really knuckle down and try to insulate themselves but cashflows are getting very dry, in my eyes”

And where there are discussions about deals happening, investors can be much more picky than they were even just a few weeks ago:

I think [in the past couple of months] there is a lot more focus on real value exchange with the end user, which is where interesting investors seem to scrutinise assumptions more proactively. Early stage companies like us find it challenging for sure, because our commercial traction is about to kick in

And even active investors can be misleading about just how active they are:

The worst is when investors say they’re still investing through the dip but when you ask how many they have invested in over the past couple of months, it is zero (or minuscule compared to previous years)! 

Definitely still some good investors doing good work at the moment, but cutting through the noise is difficult for founders at the moment.

Same old story?

A few old familiar criticisms that have been around forever cropped up in the responses I received, with the suggestion that longstanding flaws in UK and European tech investing are an additional factor aggravating the problem of founders not being able to fill up their rounds. One founder said:

I think early stage investors and funds are sadly hiding behind excuses such as 'too early', 'risky market dynamics' and 'not enough traction' to justify the lack of knowledge about a certain industry (or lack of cash?)

Another said founders who don’t tick certain stereotypical boxes can find the current market particularly challenging:

I think the early-stage investment environment in the UK/EU isn't favourable to founders who don't fit the stereotype. I feel that there's an invisible higher standard that you're held at and the only way to succeed is to look more successful than you are. This is quite frustrating as it's not about being great and having a solid business model with a strong team but more about optics.

The state of the financial economy hasn't done much but perpetuated the difficulties. It was hard to have an opportunity to even pitch before the economic meltdown, and it's significantly harder now. 

That sounds grimly familiar. And it’s worth adding this point another founder send me, too:

Seeing investor after investor knock a company due to "market conditions" does nothing to help the morale of a team, no matter how passionate or ambitious the company mission is. 

Based on that kind of experience, it’s unsurprising I was told things this week that I used to hear more commonly over 10 years ago, when founders would routinely disappear off to the US rather than try to build a company in the UK:

“We are focusing more on the US market, as UK investors are way more conservative; their strategies are not designed for truly early-stage startups.”

In general I notice a huge difference in attitude between US and European investors. I much prefer dealing with the former to date (with a small number of exceptions).

Becoming more investable (if you can)

One founder who chose to put his name to his comments was Joe Martin of adtech startup Tickle, which we covered in June. For startups who are in a position to monetise their business earlier than they might have previously planned, he suggests they do so.

Having recently shifted focus away from fundraising, Martin says Tickle soon “will be generating enough revenue upon launch to drive us through to greener pastures whilst also strengthening our position as an investable option for the investors we are already engaged with by reducing their risk further ready for when they are ready to engage again. If, of course, we still need to raise by then.”

Martin continues:

Focus on your core proposition and position yourself as a point of value to whoever it is you and your business is serving. If they are struggling because of the socioeconomic factors going on around us then work even harder to find a way to help them as this, in turn, will build a longer and more valuable relationship on the other side.

It will also prove to investors that when the chips are down, you are able and prepared to double down as well and still generate business and if your business exists because you are much more cost effective/faster/better than whatever the current solutions are on the market (and it should) then now is the time they need you most, so get out there. 

And he says that shifting focus away from fundraising has counterintuitively attracted investors.

Ironically, and much like love (so I've heard), since shifting focus we've seen an increase of investors actively approaching us now that we are not pushing as hard to find them simply by putting ourselves out there to help others during this time and focusing on our product and those will benefit from making their ads much more effective - as is our solution.

Of course, if you’re a deep tech startup, chances are you’re still years away from revenue at the pre-seed/seed stage, but if you’re in a position to need investors less, it’s not a bad idea.

An optimistic take

The traditional VC summer break is undoubtedly a factor in slower early-stage dealmaking, and we’ll have to see if the ‘it’ll get better in September’ mantra I’m hearing from some founders truly plays out.

But the thing is, it’s not necessarily a bad time for investors to help the next big thing get going by putting the first money in, no matter what the weather’s like downstream at this exact moment.

As Angular Ventures’ Gil Dibner wrote in a Medium piece yesterday, the change of pace can be a positive thing:

For the first time in a long time, all of our conversations with founders are grounded in reality. Founders are asking for reasonable amounts of capital at reasonable terms to achieve potentially extraordinary things with manageable risk.

There is time for conversation, time for questions, time to get to know one another, and time to align. There is a return of mutual appreciation and respect. We tremendously respect founders that are making reasonable asks, driving reasonable burn rates, and taking on risk — and founders, in turn, seem to have a new appreciation for the real risk that investors are taking by believing in them.

At a time when many investors are hesitant, signalling that you’re actively keen to write cheques is a good way to attract extra dealflow, and that’s obviously going on in Gil’s piece, but it feels like there’s some truth in the upsides of a return to sanity from the crazy valuations of recent years.

The likes of Octopus Ventures and Ascension are active at pre-seed in the UK, and international investors like Miami-based Pareto Holdings, co-founded by Shutterstock founder Jon Oringer, are also active in the UK pre-seed space.

Octopus pre-seed investor Maria Rotilu acknowledges that “the market downturn is real for later stage companies and it's creeping into the pre-seed stage where rounds aren’t closing as quickly as they were 12 months ago.”

However, Rotilu adds:

Founders are arguably solving and monetising more difficult problems than ever and we see this as an incredible moment to be making investments. We're putting more emphasis than ever on fundamentals, clear paths to monetisation, runway and capital efficiency to ensure there is sufficient funding to reach the metrics needed for strong follow-on fundraising, and we're always asking 'why now', but ultimately, we’re investors and we’re still investing.

Maybe it’s time that many more investors joined the seemingly small number who understand the current early-stage opportunity. After all, many a tech giant has been founded in a downturn.

The founders I speak to on a regular basis (genuinely a good selection of startups working on interesting problems and keen to accelerate their growth) would agree with that sentiment.

• Got something to add? PreSeed Now members can comment on this issue. Just hit the little speech bubble icon. Alternatively, hit ‘reply’ to this email to drop me a line with your thoughts in private.

💡 Member spotlight

Meet a member of the PreSeed Now community

Paul Kinlan

Paul Kinlan is Senior Staff Developer Advocate at Google and leads the Chrome developer relations team from the idyllic but perhaps unexpected location of rural Wales.

He explains: “I help web developers and businesses do more with the web. Specifically, I help them to understand where and how to make the best of the platform and show them what's possible in a web browser so we can open up new markets for them.”

Paul also supports startups in North Wales, a part of the world not particularly known for tech but I’m told there’s lots going on. I’m going to look into the startups in that area soon.

Find out more at Paul’s blog or Google’s web.dev site.

Paul adds: “In the current climate I would love people to pay it forward and offer your support to startups and entrepreneurs who are trying to get a start with their ideas.”

Amen.

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☀️ Back on 23 August

PreSeed Now is making like a VC and taking a summer break. But it’s only for a week, so I won’t be setting a contentious out-of-office reply. The newsletter will return with more profiles of great startups from 23 August.